My country is facing a critical depreciation of its currency's exchange rate and the central bank has introduced a 100 percent cash margin requirement on a selected set of imports.

My main problem is how this can help to stabilize the currency?

The selected set of imports include some products which my country doesn't manufacture at all. So how can this help stabilize the exchange rate if people still keep consuming the imported goods because they have no other alternative?

1 Answer
1

Simply because when you want to buy goods from country A, you (generally) first have to buy A's currency, which means selling yours.

And given that selling a currency exerts a downward pressure on its value, the main idea behind a 100 percent cash margin requirement is about counter-balancing the depreciation by exerting an inversely-proportional upward pressure.

That being explained, if importators do so by mobilizing already-owned and in-excess cash, there is no reason for such a policy to work... which is unlikely, say, in the case of Turkey, since domestic liquidity have already been sold, which means buying them back.

$\begingroup$So does this mean the cash margin is just a way to discourage people from 'selling' our own currency? i.e. If you want to buy Rs100 worth foreign goods you need to deposit another Rs100 ? And also It will be very valuable if you can explain how this cash margin is implemented. Do the sellers have to deposit it in the bank for a given time?$\endgroup$
– Pasan W.Nov 13 '18 at 17:07

$\begingroup$@PasanW. Yes, this can ultimately be seen as a way to discourage people from 'selling' the national currency. Yes, if you want to buy something in a foreign currency which worths Rs100, you will have first to immobilize Rs100 in a domestic account: at the end you have actually engaged Rs200. The only limit in time over which the sellers will be allowed to "get" their money back is politically established, probably depending on domestic economic conditions.$\endgroup$
– keepAliveNov 14 '18 at 0:25